15 March 2019

Loans to employees

If your business makes a loan to employees or relatives, what are the potential tax problems for both employees and employers?

A reminder that if your business makes a loan to employees or their relatives, this could potentially create tax problems for both employees and employers.

Please don’t forget that the term “employee” includes directors, and also that loans to family members may be caught.

A beneficial loan is one that is interest free or the rate charged is below the “official rate” and the benefit is the difference between these interest charges.

Fortunately, not all loans create a tax problem and certain loans are exempt from this reporting obligation.  These could include loans provided:

  • in the normal course of a domestic or family relationship as an individual (not as a company you control, even if you are the sole owner and employee);
  • with a combined outstanding balance due from an employee of less than £10,000 throughout the whole tax year;
  • to an employee for a fixed and never changing period, and at a fixed and constant rate that was equal to or higher than HMRC’s official interest rate when the loan was taken out – the official rate for 2018/19 is 2.5%;
  • under identical terms and conditions as those provided to the public (this mostly applies to commercial lenders); or
  • that are ‘qualifying loans’, meaning all the interest charged to the loan account qualifies for tax relief.

If the loans provided are not exempt as above, the employer will have an obligation to report the beneficial loan on forms P11D and pay Class 1A NIC on the value of the benefit.  The deemed benefit would also be a taxable benefit in kind for the relevant employee.

Any loans that are written off to employees, whether or not they are classed as beneficial loans, will also create a National Insurance Class 1 charge for the employee.

They must be reported on a P11D and the employer has an obligation to deduct and pay Class 1 NIC from the employee’s salary, on the amount written off for tax purposes.

Calculating the taxable benefits for chargeable loans can be somewhat complex and therefore advice should be taken if you are unsure of your tax and NIC responsibilities.